From 1 July 2019, businesses will only be able to claim deductions for payments that are made to workers (employees or contractors) when the employer has complied with the pay-as-you-go (PAYG) withholding and other tax reporting obligations for that payment.

If the PAYG withholding rules require a business to withhold an amount from a payment that the business makes to a worker, the business must:

• withhold the amount from the payment before it is paid, and
• report the amount to the ATO.

Any payments that are made where the business hasn’t withheld or reported the PAYG tax are dubbed by the ATO to be “non-compliant payments”, and for these an employer will not be able to claim a deduction.

Note however that if the employer makes a mistake and withholds or reports an incorrect amount, they will generally not lose their deduction — as long as the ATO is notified and a correction is made.

Payments that must comply

An employer can only claim a deduction for the following payments if they comply with the PAYG withholding rules. This includes payments:

• of salary, wages, commissions, bonuses or allowances to an employee
• of directors’ fees
• under a labour hire arrangement, and
• for a supply of services (except from supplies of goods and real property) where the contractor has not provided their ABN.

Non-cash benefits

A non-cash benefit is something that is provided instead of paying cash — for example goods or services. In this case, a business still needs to report to the ATO in order for this to be classified as a compliant payment and therefore allow the employer to claim a deduction.

Correcting a mistake

If a business withholds an incorrect amount by mistake, they shouldn’t lose their deduction. To minimise any penalties, and employer can correct their mistake by lodging a voluntary disclosure via the approved form.

If a business withheld the correct amount but made a mistake when reporting it, they also should not lose their deduction. However the ATO advises that they should correct the mistake as soon as possible.

Mistaking an employee for a contractor

There may be a situation where a business honestly believes their employee is acting as a contractor, and so believes they are not obliged to withhold PAYG tax from payments as the “contractor” has provided their ABN.

In this instance, although the business made a mistake and did not withhold PAYG tax from payments made to that worker, the business should generally not lose their deduction for these payments because the employer complied with the withholding obligations for a contractor. Again, a correction will need to be made via the approved form.

Remember also that should PAYG withholding obligations not be met, apart from losing a deduction there is also the prospect of having to face the already existing penalties that apply for both failing to withhold and failing to report such amounts to the ATO.